California should invest in modern telecommunications infrastructure, not high speed rail

Stanford University public policy professor Joe Nation makes an excellent point in this article on transportation infrastructure. Nation, a former California state legislator, notes high-speed trains work in densely populated areas (like the Boston-New York-Washington corridor, for example) and not states like California with large rural, quasi-rural and exurban areas.

In the evolving digital, information-based socio-economy (much of it innovated in Silicon Valley), the Golden State would likely be better off  investing in fiber to the premise telecommunications infrastructure. Particularly since market forces don't tend to produce meaningful private investment in premise telecommunications infrastructure in less densely populated areas that are in danger of becoming neglected backwaters left off the Internet. Putting this infrastructure in place would also enable these areas to more fully participate in the digital economy, reduce the need for commutes to metro areas and benefit from services such as telehealth and distance learning.

High speed rail might have been a suitable project had it been proposed three or four decades ago. What's needed today is ubiquitous, high speed Internet.

IP Transition Must Advance, CES Panel Says | USTelecom

IP Transition Must Advance, CES Panel Says | USTelecom: Meanwhile, AT&T has been eager to begin moving forward with the IP transition and last year proposed that the Federal Communications Commission begin trials to test the effects of a full network transition, said Bob Quinn, AT&T senior vice president-federal regulatory. The role for FCC is to oversee the "turning off" of the old network, Quinn said. "There will be an enormous amount of policy concerns involved in doing this, and we need to figure out what this new world will look like."

"We've reached the point where the IP network is superior to the old switched network," said Internet analyst and author Larry Downes. "The policy issue is what do we do about people who have not yet made the switch?"

There's also the issue of telephone companies that have not yet changed out their old POTS copper cable plants to fiber optic capable of supporting data and video as well as voice services using voice over Internet protocol (VOIP). This isn't only about consumers who haven't made the transition off wireline POTS for premises service. For many, they don't really have a choice for wireline-delivered voice service.

AT&T and other telcos are hoping consumers will be satisfied with using mobile wireless service for both voice and Internet access since they don't plan to invest in fiber to the premise (FTTP) infrastructure to replace their obsolete copper networks that cannot serve many homes and businesses due to technological limitations. Communities can offer their residents a far better option by building municipal or consumer telecommunications cooperative owned and operated FTTP networks instead of leaving their residents relegated to supbar mobile wireless services that can't provide adequate bandwidth and value.

Kan. bill would outlaw public broadband service - Washington Times

Kan. bill would outlaw public broadband service - Washington Times: Officials in the southeast Kansas city of Chanute, population 9,100, say they’re the primary target of the proposed legislation. As part of its public utility system, the city runs an ultra-high-speed broadband network that now serves schools, city buildings, the town hospital, banks and other key businesses.

On Nov. 23, the City Commission voted to work toward “fiber to home,” which would extend access to all residents and businesses within about a three-mile radius around the city, said Larry Gates, Chanute utilities director.

“This bill is an attack on competition, an attack on municipal government,” Gates said. “It takes away our local control and local decision making. It will hurt our efforts in economic development,” he said. (Emphasis added)

I respectfully disagree with Mr. Gates' characterization of the bill as an "attack on competition." Utility infrastructure by nature isn't a competitive market. It's really an attack on progress that threatens the incumbent telephone and cable providers backing the measure.

Upgrading the nation's telecommunications infrastructure to fiber to the premise to support new Internet protocol-based networks represents progress in the digital age just as interstate highways did in the 1950s. No one would describe paved roads as "competition" to dirt roads. By bullying local governments to get their way, the incumbents are on the wrong side of this issue. Americans like progress and they hate bullies. If they keep it up, local governments should respond by exercising their redevelopment and inverse condemnation powers to take over incumbent assets and upgrade them to fiber to the premise.

Market failure – not market competition – spurs community Internet infrastructure projects

A major misconception -- largely advanced by legacy incumbent telephone and cable companies – is local governments build Internet infrastructure because they want to compete with the incumbents. Competitive markets are those characterized as having many sellers and many buyers. That’s not possible with Internet infrastructure due to high barriers to entry and high ongoing operating costs.

Local governments build Internet infrastructure not to engage in market competition with incumbent legacy cablecos and telcos. They do so in response to market failure where the incumbents cannot profitably serve local needs. Lacking sufficient potential profits, the incumbents naturally aren’t going to be inclined to upgrade and build out fiber networks. 

In terms of those left off the Internet “grid,” the scale of this market failure in the United States is substantial. The U.S. Federal Communications Commission (FCC) estimates about 19 million Americans live in homes where Internet service isn’t available.

Net neutrality debate underlies strategic tensions between legacy telcos, cablecos and content providers

Underlying the public policy issue of whether the U.S. Federal Communications Commission (FCC) has legal authority to bar Internet service providers from treating the Internet as a private toll road and charging higher fees for digital express lanes – a policy known as “net neutrality” – are deep tensions between legacy telephone and cable companies and content providers. The courts are now addressing the legality of this policy, with the question to potentially come before the U.S. Supreme Court. But how the tensions between big telephone and cable companies and Internet content and social media services are resolved in the marketplace could ultimately have a much bigger impact than the courts.

The telephone and cable companies maintain they need revenue from content providers to offset CAPex and OPex costs of the infrastructure to deliver the services and as such are entitled to payment for access to their networks. In short, their position is they can charge for access on both ends of the Internet: where services like Netflix enter their “pipes” as then-AT&T Chairman Ed Whitacre famously described them in 2007 and also at consumer premises where they are delivered. From the perspective of the content and service providers, given end users pay for access, they too shouldn’t have to pay to get content on network. And to boot, a network they view as technologically deficient and unable to provide sufficient current and future bandwidth as evidenced by Google’s limited venture into fiber the premise (FTTP) infrastructure via its Google Fiber unit. The incumbent inferiority gap has been recognized by former FCC official Blair Levin, who observes that big telco and cable companies have no plans to meaningfully upgrade and build out their networks.

While the courts will ultimately provide a tactical win to one side or the other on the issue of net neutrality, the strategic market tension between the sides over who owns and operates Internet infrastructure and who pays for it will nevertheless remain. How might it be resolved?

A possible scenario is the formation of an alliance among the big content providers and the Internet backbone transport players with the mission of dislodging the telco/cable cartel and its moribund, slow-moving pre-Internet business model. Call it the nuclear FTTP overbuild option. Given the hundreds of billions of dollars required to build out FTTP in the United States, a strategic initiative on such a massive scale would likely have to be a public-private partnership with private members such as like Level 3, Cogent Communications, Google, Amazon, Netflix, Ebay,Yahoo!, LinkedIn, Twitter as well as entities involved in the telehealth, distance education and the emerging markets of smart homes and the device-driven “Internet of things.” The federal government would be the public partner, providing capital through long term bonds to finance a strategic national Internet initiative to replace lethargic, highly contentious subsidy efforts such as the Connect America Fund that could take decades –if ever – to construct adequate Internet infrastructure serving all Americans.

Fiber to the premise obsoleting net neutrality debate

A ruling this week by a federal appellate court blocking U.S. Federal Communications Commission rules barring Internet service providers from effectively erecting toll gates and speed bumps as revenue enhancement mechanisms is likely to fuel the policy debate on the proper role of the Internet: whether it should be regulated like a public thoroughfare -- the infrastructure of an increasingly digital economy -- or as a private, profit producing asset.

Investor owned, rent seeking providers such as telcos and cable companies will naturally gravitate toward business models that treat digital Internet traffic as a limited commodity that must be broken down, packaged and sold in discrete bundles and flow rates. The more data and the faster the flow rate, the higher the price.

The big problem for this business model is it's being obsoleted by technology. Fiber to the premise (FTTP) infrastructure is the emerging standard for delivering Internet to homes and business customers. It does not have the inherent limitations of metal wire and cable infrastructure, where a rational, technology-based argument can be made for treating bandwidth as a limited commodity. Once FTTP infrastructure is in place, adding more capacity can be accomplished at relatively negligible cost.

Strong parallels between individual health insurance and Internet service markets

Telecommunications providers, consumers and policymakers should be aware of the strong parallels between wireline residential Internet service and the individual health insurance marketplace as it existed prior to the market reforms of the Patient Protection and Affordable Care Act.

Both residential Internet providers – and formerly individual health insurers -- shared a business model whose success is ironically predicated on not selling to all potential customers in their market areas. The underlying principle is risk aversion: vendors believe they cannot adequately manage the risk of loss associated with an expanded market. A smaller, more certainly profitable customer base is better than a larger one notwithstanding the potential for greater revenues.

Before the Affordable Care Act outlawed the practice starting this month, individual health insurers employed underwriters charged with selecting relatively healthy individuals less likely to incur high medical costs, refusing to offer coverage those who didn’t meet specified underwriting standards. Similarly, wireline residential Internet service providers offer service to one address while declining to serve another nearby – even as close as quarter of a mile away or less. As individual health insurers did, these providers reject the latter residences (as well as some small business sites) as more costly to serve and thus less potentially profitable. Their infrastructures are engineered and built to accommodate preferred addresses and redline the rest.

The problem with this business model for individual health insurers is that medical underwriting limited the size of the pool of individuals and families who could pay premiums to cover claims costs. Consequently, the pool and the number of healthy people staying in it shrank to the point it was on the verge of collapse when the Affordable Care Act was enacted in 2010. The federal law intervened to head off market failure by requiring health plan issuers to sell to anyone applying for coverage regardless of medical history or health condition.

The restrictive marketing practices of Internet service providers bring about a similar problem. Just as insurance pools are more viable with more people in them, telecommunications networks are more valuable when more people are on them or able to get on – both for providers and subscribers. This principle is known as Metcalfe’s Law. Those who argue for broader deployment of fiber to the premise (FTTP) Internet infrastructure carry over the Metcalfe principle to economic activity and education. Greater numbers of premises with modern Internet access can lead to more online commerce and business formation. Increased access to information and educational curricula, similarly, lead to a more informed and better educated society.

As time goes on and these broader benefits – and conversely costs of not having affordable premises Internet access – become more evident, it could lead to large scale market reforms such as are now reshaping the individual health insurance market.